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A Lease and a Lease Guaranty Involve Different Rights and Remedies

Sister blog The LLC Jungle recently posted about an opinion from California’s Sixth District Court of Appeal — Orozco v. WPV San Jose, LLC — describing the legal difference between an LLC tenant, and the LLC’s owner who signed a guaranty for the lease.  See An LLC And Its Owner Are Not The Same Legal “Person.”  From the LLC law perspective, the case confirmed that an LLC and its owner are not the same legal “person.”

Beyond the LLC context, the case also contains valuable leasing-oriented lessons regarding the separateness of a lease and a guaranty, which is worth exploring here on Money and Dirt.  Just as a loan borrower and guarantor have very different rights under California law, the same is true with a lease tenant and guarantor.

Facts: LLC signs commercial lease; LLC’s owner signs guaranty

Paul Orozco operated Pauly’s Famous Franks N Fries (Pauly’s) a restaurant serving gourmet hot dogs, sausages, and specialty french fries at The Plant shopping center in San Jose.  Orozco was also the 100% owner of Solid Restaurant Ventures, an LLC he formed to operate Pauly’s.

Before signing a ten-year lease at The Plant on behalf of the LLC, Orozco asked the landlord’s leasing manager whether any restaurants with competing concepts were being considered for the remaining unfilled buildings.  The leasing manager assured Orozco that no such restaurants were being considered, even as she was negotiating a lease with Al’s Beef, a national franchise selling hot beef sandwiches, hot dogs, and french fries.

Orozco signed the lease on behalf of his LLC, and also signed a lease guaranty as an individual guarantor.

Pauly’s debut was successful, but after a few months Al’s Beef opened two stores down, and Pauly’s sales crumbled.  Within six months, Pauly’s closed.

The LLC and Orozco sued the landlord for fraud and rescission.

Trial court: lease and guaranty are intertwined; no separate remedy for guarantor

Following a trial, the jury rendered verdicts that the landlord had committed fraud.

The LLC elected a damages remedy instead of rescission, and the LLC was awarded damages caused by the fraud.

Orozco, however, continued pursuing rescission of the guaranty.  But the trial court ruled that Orozco could not obtain rescission of the guaranty because the lease and guaranty were intertwined, the LLC had elected damages over rescission, and Orozco had suffered no individual harm.

Court of Appeal’s Opinion: tenant and guarantor are entitled to separate remedies

The Court of Appeal reversed, holding that the lease tenant (the LLC) and the lease guarantor (Orozco) were “two distinct juridical persons.”

The court first confirmed that the judgment for fraud damages in favor of the tenant was appropriate.  The landlord argued that the tenant could not have reasonably relied on the leasing manager’s misrepresentations about no competing businesses entering the space because the final lease language recited that the landlord made no promises regarding any other tenants in the center.  The court held it is “well-established” that such generic disclaimers “do not operate to insulate defrauding parties from liability[.]”

Turning to the guarantor’s remedies, the court rejected the trial court’s position that the lease and guaranty were too intertwined to allow different remedies.  The court found that Orozco was individually damaged by entering into the guaranty “that he would not have freely entered into if he had known about Al’s Beef,” and held that “anyone who is fraudulently induced to enter into a contract is injured” sufficiently to allow for rescission.  Because the lease and guaranty were separate, Orozco could obtain rescission of the guaranty even though the LLC tenant obtained damages for fraud on the lease.

Lesson

A lease and guaranty give rise to different rights, obligations, and remedies.  A lease tenant and the lease guarantor are not the same legal “person.”

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